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Market Update: Oil & Gas - May 2018

Market Update: Oil & Gas - May 2018

This year’s quarterly earnings season kicked off with a resurgence in Oil & Gas company profitability.


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Improving cash flows, capital discipline & OPEC

In the context of a rapidly improving oil price environment, this year's quarterly earnings season kicked off with a resurgence in Oil & Gas company profitability. Structural change focusing on cost reduction and operational efficiency is clearly having an impact, with Shell generating more earnings this quarter then they did with oil at $100 per barrel (1) and BP putting in the strongest quarterly performance since 2014(2). With crude now at a four-year high, Q2 results promise to unveil even stronger cash flows for the upstream O&G sector.

Despite a stronger macro picture, capital discipline remains the focus for Supermajors and Independents alike. By and large, the sector leaders have announced limited, if any, increase in capital expenditure. Given the severity of the oil market downturn a pivot towards capital discipline and shareholder returns is no surprise, and it is this prudence that is catching the eye of OPEC and its allies.

With world-wide inventories close to their five year averages, a key criteria of the original supply curb pact has been met. Countries party to the Vienna agreement to cut output have indicated it may be time to re-assess the metrics on which it should now focus on, such as investment levels into new upstream projects, in order to offset declines and so mitigate against future oil shortages(3).

Against a backdrop of restrained investment, the oil market is noticeably tighter and so becoming increasingly vulnerable to geopolitical events such as the change in US position on Iran. Rising prices combined with reserve replacement considerations will, we believe, undoubtedly lead to an increased level of FIDs; whether or not investment levels will be strong enough to meet strong global demand growth and potential supply disruptions is yet to be seen.

- Mr. Mohammed Chunara, Associate Director, Energy & Natural Resources, KPMG in the UK

The Permian Basin: An insatiable thirst for water

The Permian Basin in West Texas is forecast to reach production of 3.18 million barrels a day in May 2018 according to the Energy Information Agency. By 2023, production in the basin may exceed 4 million barrels a day, bringing the Permian closer to being the largest oil field in the world - beating the Ghawar field in Saudi Arabia at 5.8 million barrels per day. In order to meet these forecasts, critical elements of operations like rigs, steel, sand, labor, etc. will have to be managed to higher standards but none of them more than water.

The demand for water in Oil & Gas, drinking, farming and other industrial needs requires groups to work together to ensure all needs are met. An example of this kind of collaboration between O&G and the public sector can be found in Pioneer Natural Resources partnership with the City of Odessa. The two entities announced the start-up of a 20-mile, US$25 million infrastructure project to both save water and cut costs for the mutual benefit of the company and the city of Odessa. The project is the key component of an 11 year, US$117 million agreement between the company and Odessa to provide Pioneer with millions of gallons of treated municipal wastewater for use in its operations. In return, the region will see a reduction in truck traffic and a regular revenue stream to the city.

Cooperation like this can lead to win-win situations for both O&G companies and municipalities and are necessary for the success of the industry in the Permian Basin.

- Mr. Steven M. Estes, Advisory Oil & Gas Lead, KPMG in the US

Geopolitical effects of the reinstatement of US sanctions on Iran

The geopolitical effects of the reinstatement of US sanctions on Iran, as well as the rosier demand picture, are pushing the oil price back to the normal level of US$70-80 per barrel. A medium-term stability of the price in this range will hopefully give producing companies and countries sufficient time to come up with longer-term decarbonization strategies. The potential end of the hydrocarbon era still creates long-term fundamental uncertainty.  

- Anton Oussov, Global Head of Oil & Gas and Head of Oil & Gas in Russia and the CIS, KPMG in Russia.

Eurasia Group’s POV: Trump reimposition of oil sanctions on Iran

US President Donald Trump on 8 May announced the decision to withdraw the US from the Joint Comprehensive Plan of Action. Rather than just reimpose oil sanctions, however, Trump reintroduced all pre-nuclear deal sanctions, indicating a more aggressive position on the part of the US administration toward Iran. While it is still possible Trump will agree to a new deal at a later time, given European and Iranian positions, the odds of a renegotiation are low in Eurasia Group’s analysis. As a result, after 180 days (starting 5 November), importing countries will need to make significant reductions in their purchases of Iranian crude. Not all countries are likely to respect US oil sanctions even if fully imposed. The EU, Japan, and South Korea will not only abide, but probably curtail purchases quicker than required. Yet China, India, and possibly Turkey could resist. Roughly 300,000 barrels per day (bpd) to 500,000 bpd will probably come off the market in the next six months. Moreover, the decision is also likely to fuel more volatility in oil prices driven by an uptick in regional instability. Iran will likely turn up the temperature in regional hotspots (including Iraq, Lebanon, Syria and Yemen) against the US, Israel, and Saudi Arabia, although a regional war remains unlikely.

- Divya Reddy, Practice Head, Global Energy & Natural Resources, Eurasia Group*.

*Guest contributor for May edition

Analyst estimates: oil

  2018 2019 2020 2021
Min 58.3 55.0 56.0 63.5
Average 65.5 62.8 64.4 66.1
Median 65.8 62.0 65.0 65.0
Max 71.0 70.0 70.0 70.0


  2018 2019 2020 2021
March Avg 62.6 61.8 62.9 65.7
April Avg 65.5 62.8 64.4 66.1
March Median 62.8 61.9 62.0 65.0
April Median 65.8 62.0 65.0 65.0

Analysts estimate: gas

  2018 2019 2020 2021
Min 2.8 2.7 2.7 2.7
Average 2.9 2.9 2.9 2.9
Median 2.8 2.9 2.8 2.8
Max 3.1 3.3 3.2 3.2


  2018 2019 2020 2021
Mar Avg 2.9 3.0 2.9 2.9
April Avg 2.9 2.9 2.9 2.9
March Median 3.0 2.9 2.9 2.9
April Median 2.8 2.9 2.8 2.8

Note: The forecasts/analyst estimates above from Brent & Henry Hub are an indication based on third party sources and information. They do not represent the views of KPMG.

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